PowerTrend Brief: Forget the Weather and Invest to Profit from D.C.’s Latest Regulatory Pain

Chris Versace
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Posted: Feb 26, 2014 12:01 AM
PowerTrend Brief: Forget the Weather and Invest to Profit from D.C.’s Latest Regulatory Pain

The last few weeks have been far more than just interesting. We’ve been barraged by a number of winter storms that are taking their toll on January economic data. We’ve already heard of disappointing January car and trucks sales. We received official word that January housing activity was slower than expected. Given the severity of the winter weather, was any of that really a surprise to you?

I should hope not.

But as I have informed subscribers of my monthly investment newsletter, PowerTrend Profits, the stock market in 2014 is going to be very different from the stock market of 2013. Last year, it was very easy to make money in the market. As the trite saying goes, a rising tide lifts all boats. When the S&P 500 is up some 30%, most investors are making out. The 2014 version of the market will reward good stock pickers but leave other people unfulfilled. That situation means not only rolling up your sleeves to do your homework, but also understanding which industries will continue to flourish and which will start to peter out. More on that can be heard inmy 2014 market outlook.

As an example, let’s take a look at the housing industry. In recent days, we’ve had weaker-than-expected January housing starts and building permits, a miss on the National Association of Home Builders (NAHB)/Wells Fargo housing market index for February and figures from the Federal Reserve Bank of New York showing that household debt (mortgages, credit cards, auto loans and student loans) jumped $241 billion between October and December to $11.52 trillion. Layer in last week’s drop in the Mortgage Bankers Association weekly mortgage application survey, which showed the Purchase Index component at its lowest level since September 2011, and one would think housing stocks are pulling back across the board.

Nope.

Instead, it’s a mixed bag, with some homebuilders outperforming the broader market indices thus far in 2014 and some dragging way behind. The shares of homebuilder DR Horton (DHI) are up 5% year to date, and NVR (NVR) shares are up an impressive 13% on the same basis. With shares in both companies climbing, you have to think the stock market is looking past recent weather disruptions and their impact. But the outperformance enjoyed by those homebuilders is not universal. There are a number of homebuilders whose shares have taken a bunch of lumps during the last few weeks -- Standard Pacific (SPF), MDC Holdings (MDC), Hovnanian (HOV), M/I Homes (MHO) and Beazer Homes (BZH) are all down between 6-14% year to date.

To me, this dichotomy reinforces something I have known for some time -- not all homebuilders are the same. Coming off of a depressed housing market, a rising tide tends to lift all boats. Much like the stock market this year, choosing a homebuilder to invest in this year requires you to be far more choosey than in the last few years. That reality means getting the answers to questions like the following: Which homebuilders have the better parcels of land in the more desirable areas to live with the better school systems? Which homebuilders have captive mortgage operations that can goose profits and close homes? Is the backlog rising? Is pricing in the backlog rising? What’s the cancellation rate? Is the homebuilder using more incentives to close deals?

Now you can go through all of that and ferret out which of the dozen or so homebuilders is the best one to buy.

I personally prefer to invest in the parts of the stock market that have clearer signs of demand, particularly ones with ample demand ahead. Data from research firmPolkshows the average age of light trucks to be more than 11 years old -- the highest it’s been for the last 10 years. Data fromExperian Automotiveshows that the average age of all medium-duty vehicles was 11 years, while heavy-duty vehicles averaged 12.3 years. That market research factors in the strong year of automotive sales we saw in 2013. Yet, there is far more upside to go.

Combine those vehicle ages with news this week that President Obama is driving (no pun intended) another round of engine emission standards to be phased in by 2016, and it means the next two years should be robust ones for the auto and truck industry. Consumers, businesses and others will buy more cars during the next two years to avoid price hikes that inevitably will occur in 2016 when vehicles will be equipped with increasingly expensive engines to comply with the next round of emissions regulations. In economic terms, vehicle buyers will be pulling demand forward. Historically, once that mandate deadline passes, we will see a drop-off in demand. While that’s not great news for 2016, it sure is good news for the next two years.

That’s just one example of why I keep close tabs on the shifting regulatory environment coming out of Washington, D.C., as well as the potential pain points that could ensue. After all, pain points make for some of the best investing opportunities.

Don’t take my word for it, just ask a subscriber toPowerTrend Profits!

In case you missed it, I encourage you to read myPowerTrend Briefposted last week onEagle Daily Investorabouthow dividends indicate upside in stocks. I also invite you to comment in the space provided below my column atEagle Daily Investor.

NOTE: Fabian Wealth Strategies is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Publishing.